CFPB Report January 11, 2013

CFPB Releases QM/Ability to Pay Rule

On Thursday, January 10, 2013, the CFPB published its highly anticipated Ability to Pay/QM rule. The rule is intended to protect borrowers from risky lending practices such as “no doc” and “interest only” features that contributed to many homeowners ending up in delinquency and foreclosure after the 2008 housing collapse. 

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said Director Cordray. “Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.” 

The following is an initial analysis of the QM portion of the rule, from the CBA Advocacy Team:

  • To be considered a “Qualified Mortgage (QM)” the monthly payment must have a back-end “debt-to-income” (DTI) ratio of no more than 43%, based on the highest payment that will apply in the first five years of the loan.
  • Loans with points and fees exceeding three percent of the loan amount are excluded from the QM definition (with the exception of certain “bona fide discount points”), as are “no-doc” loans and loans that have negative amortization, interest-only payments, balloon payments, or terms exceeding 30-years.
  • For a temporary, transitional period of no more than seven years, loans that do not meet the 43% DTI may still be considered a QM if they meet government affordability or other standards, such as eligibility for purchase by Freddie Mac or Fannie Mae.
  • If a loan qualifies as a QM, the lender will receive certain legal protections. For lower-priced, or prime loans, lenders will have a “safe harbor” in which consumers may challenge the loan only if they believe it does not meet the QM definition. For higher-priced loans, there will be a “rebuttable presumption” in which consumers may also challenge the loan by proving they do not have sufficient income to pay the mortgage and other living expenses.
  • In order to make non-QM loans, the loan must meet certain requirements and lenders must consider specific underwriting criteria, as well as use reliable third-party records for verification.
  • Along with this final rule, the CFPB has issued a proposal on the following:
    • How to calculate the loan origination compensation that will be part of the QM points and fees limit.
    • Whether it would be appropriate to exempt certain non-profit lenders, homeownership stabilization programs, and certain Federal agency and GSE refinancing programs.
    • Creation of a new category of QM for loans without balloon payments and held in portfolio by small lenders.
    • Whether to increase the threshold separating the safe harbor and rebuttable presumption for first mortgage QMs from 150 bps to 350 bps for certain rural and small portfolio QMs.
  • Effective date will be January 2014.

CBA attended the CFPB field hearing in Baltimore that was held in conjunction with the release of the rule. In prepared remarks, Director Cordray said the “rule [is] designed to ensure that lenders are offering mortgages that consumers can actually afford to pay back. This is a simple, obvious principle that needs to be re-established in the housing market. It is nothing more than the true essence of ‘responsible lending’.” During the hearing, Director Cordray emphasized the goal is to facilitate mortgage lending while protecting borrowers from loans they cannot afford. However, a number of the consumer groups spoke out against the “safe harbor” liability protections lenders will have when they make loans below the designated interest rate thresholds. 

CBA will hold an exclusive members-only call on Monday, January 14, 2013 at 2:00 p.m. ET to discuss the impact of this rule on retail banks.

CBA Submits CARD Act Ability to Pay Comment

On Monday, January 7, 2013, CBA filed a comment letter concerning proposed changes to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The CARD Act currently requires credit card issuers to consider a consumer’s independent ability to pay, regardless of age. The CFPB recently proposed changes to these rules to remove this “independent ability to pay” for consumers who are over the age of 21, which is consistent with the Card Act statute, and to replace it with a requirement to permit issuers to consider income to which consumers have a “reasonable expectation of access.” CBA’s comment generally supports the proposed rule so as to facilitate the ability of certain consumers, such as stay-at-home spouses, to receive credit. 

The letter also offers the following suggestions we believe will improve this proposal:

  • The proposal would allow credit card issuers to consider income to which the certain consumers have a “reasonable expectation of access.” We support this approach that allows, but does not require, issuers to consider such income.
  • Credit card issuers should be able to rely on application information for all of the Card Act “ability to pay” requirements.
  • Certain of the proposed official interpretations that apply to consumers over the age of  21 should also apply to those under the age of  21. These include the provisions allowing issuers to consider the collective ability of joint accountholders to make the required payments and the provisions allowing issuers to consider information that is provided by the consumer or reflected in a credit report.
  • Under the proposal, whether an issuer could consider the income and assets of authorized users, household members, or other persons would in certain situations depend on whether a Federal or State statute or regulation grants the applicant an ownership interest in such income or assets. The official interpretations should specifically reference community property laws as one such example.
  • The proposed examples of the consideration of income of household members are too limited. Specifically, these would limit consideration of income only to “household members;” reference “salary,” and not other types of income; and some of the examples would limit this to the portion of salary used for “the payment of household or other expenses,” which we believe is an unnecessary limitation.

CBA will continue to monitor the issue.